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DeFi Is Real, Whatever Happens To Cryptocurrency

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DeFi Is Real, Whatever Happens To Cryptocurrency


In Jamie Dimon’s annual letter to JPMorgan Chase shareholders, he made it clear that “DeFi and blockchain are real,” which prompted some comments from the crypto community given his previous statement “I don’t care about Bitcoin.” I’m not interested. “But I think it’s safe to believe that tokenization will be huge and that Defi protocols will play a big role in the next generation of financial services, while skeptical that cryptocurrencies will play a big role.

DeFi without Bitcoin? Opinions are divided, of course, but when it comes to the interesting ongoing spat between Mark Anderson and Jack Dorsey, I’m on Anderson’s side. It’s totally unclear to me that Bitcoin BTC is the universal and utopian currency of the future, and I think the ongoing experiments in the DeFi world will open up new ways of doing business in finance in time.

I don’t think this is a controversial position. In fact, I think this has always been the view of serious players in the financial services mainstream. Irfan Ahmad (Vice President of State Street Bank, the world’s largest custodian bank) recently stated that cryptocurrencies are not only entering another winter, but a “polar vortex,” considering the collapse of the Celsius decentralized finance (DeFi) protocol and Three Arrows Capital Filing for bankruptcy, etc. Beneath the ice, however, he and other investment banks are working to use shared platform technology to build new trillion-dollar markets that don’t involve speculative cryptocurrencies but instead use digital representations tied to real-world hard assets ( i.e. tokens).

There is no paradox at all: Whether or not cryptocurrencies can weather the coming regulatory storm, central bank digital currencies, instant payments and digital identities, institutional markets will eventually use new infrastructure to trade bonds, gold and carbon digitally. It is not just a commodity that is tokenized and traded without clearing and settlement. Banks will use the technology to mark all forms of collateral, such as property titles. As the Bank for International Settlements (BIS) states in its current announcement (No. 57, June 14, 2022), “DeFi lending must tokenize real-world assets at scale unless it wants to maintain a self- The reference system is driven by speculation.”

Speaking at the Consensus 2022 conference last month, Tyrone Lobban (head of digital assets at JPMorgan Chase Onyx) detailed the bank’s institutional-grade DeFi plans and highlighted how valuable tokenized assets are.Tokenized assets from U.S. Treasuries to interesting stocks in the money market can be used as collateral in DeFi pools, bringing trillions of dollars of assets into DeFi, he said, “so we can use these new mechanisms to trade, loan [and] Loans, but are related to the size of the institution’s assets. “

true innovation

This is going to be a whole new area of ​​financial services, and it’s going to be an important one. As The Economist points out, because tokens can be a digital representation of almost anything, “they can be effective solutions to a variety of financial problems.” Among other things, tokens mean lower-cost transactions environment, which is why big players want to use them as soon as the regulatory environment stabilizes.

As Thomas Zschach, Chief Innovation Officer at SWIFT, said: “Financial institutions today typically do not use permissionless digital assets because they are unregulated and anonymous…but many financial institutions, central banks, market infrastructures​​​ Others, including SWIFT, are experimenting with digital assets — especially CBDCs and tokenized assets.”

Why? Well, SWIFT says, it’s about uncovering new opportunities to increase efficiency, reduce costs, encourage financial inclusion and continue to bring more value to its communities. This is not a unique point of view. That’s why forward-thinking financial institutions care: not because of ideology, but because of money.

One of the things that the emergence of institutional DeFi needs is digital identity infrastructure, as the legitimate market requires KYC etc. This is starting to happen everywhere (for example, in Aave AAVE Arc), but if we’re going to connect DeFi with the “real world”, we need an identity infrastructure at scale, so to speak.

Last month, I had the pleasure of having Tyrone on the digital identity panel at Money20/20 in Amsterdam. He is a thoughtful man, and I take his views very seriously. His view is that the way forward here is to use digital identity building blocks such as the W3C Verifiable Credentials (VC). I have to say I totally agree with him that VC is the key to scaling solutions and “since verifiable credentials are not kept on-chain, you don’t have the same overhead to write this information to the blockchain, pay gas bills, etc.”

indeed. They also have another important benefit: privacy.

see it clearly

Transparency is one of the key reasons we all want to see a renewed and revamped financial sector. Take a look at some of the recent issues in the financial world, like the collapse of Wirecard. Corporate accounts include assets that do not exist at all. With auditors, regulators and boards unable to prevent crime at scale here, it is reasonable to ask if technology can do a better job. Well, I think the answer is yes, and I think tokenization is part of a coherent vision of how it does this: If I claim to own a thousandth of the Mona Lisa, you can easily be on a digital asset platform Check on to see a thousandth of a token representing the Mona Lisa in my wallet. You don’t have to rely on auditors or other middlemen.

As is evident from the current crypto low temperature polar winter vortex or whatever it is now called, DeFi has some notable advantages. Arthur Hayes accurately pointed out that DeFi protocols control some huge loan books, with complete transparency of loan criteria, counterparty addresses, and liquidation levels. Observers can continuously assess the health of these books. Depositors can process all relevant information about the health of various protocols before submitting funds. And when the collateral value falls, it automatically liquidates, so there are no bad debts.

However, transparency does not mean that everything should be visible to everyone at all times. Wharton published a paper last year on “DeFi Beyond The Hype,” noting that there may be some tension between the increased auditability and transparency of shared ledger records and stakeholder privacy. For me, it’s one thing to be able to check your loan book on a shared ledger somewhere to determine if you’re solvent, and it’s another thing to know who your counterparty is.

Business can’t do that. Confidentiality is critical to business. Not only is it important for businesses to protect the privacy of their customers and suppliers, but they don’t want to reveal their strategies to competitors. Anonymity doesn’t work for the market, but complete transparency doesn’t work for participants. What is needed is not the anonymity of permissionless blockchains, but the privacy in a well-regulated environment, and this is where verifiable credentials provide. In the right trust framework, it’s easy to show credentials that I’m a U.S. citizen, 18 years old, and have (for example) a brokerage account without telling the world who I am.

(But of course the providers of these vital concerns hand over my true identity to the forces of law and order if I do bad things.)

So we come to the nexus of DeFi, verifiable credentials, and privacy-enhancing governance structures, a potential site for some kind of big bang in the financial world: the creation of a new field of financial services.

That’s why at the end of the day, I agree with Richard Turrin, who wrote that there is an urgent need to “fix rampant corruption, fix DeFi protocols that encourage leverage, fix scams, fix a culture of greed.” Lisa Wade said: “Once regulated, it will The introduction of these new asset classes into portfolios will be essential portfolio management knowledge.”

They are definitely right to say that DeFi will make financial services better.

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